BackNDA govt scripts a level playing field in defence manufacturing
The government has withdrawn tax exemptions given to state-run defence equipment manufacturers
Premium
New Delhi/Mumbai: In a bid to encourage private and foreign companies to make equipment for the armed forces locally, and ensure a level playing field, the government has withdrawn tax exemptions given to state-run defence equipment manufacturers.
Not only is this expected to give a push to the National Democratic Alliance government’s ‘Make in India’ initiative, but it is also likely to encourage more private sector firms to collaborate with foreign partners and enter the defence equipment manufacturing business.
In a statement, the commerce and industry ministry said that the government has withdrawn excise and customs duty exemptions granted to goods manufactured and supplied to the defence ministry by Ordnance Factory Board and state-owned defence firms.
“This will provide a level playing field to domestic private players bidding for the government contracts by taking away the strategic advantage with PSUs (public sector units) for quoting lower rates in open bids. With this initiative, the Government has also fulfilled demand of foreign Original Equipment Manufacturers such as Boeing, Airbus, Lockheed Martin, BAE Systems etc. who are actively exploring the scope of future investments in India," the statement said.
Having raised the cap on foreign direct investment in defence equipment production to 49% from 26%, the government is hopeful of gradually meeting most of the requirements of the armed forces by producing locally with the help of foreign companies rather than through imports.
Many Indian and foreign companies have shown interest in setting up manufacturing units in India but have shied away due to various constraints, including the tax exemptions.
M.V. Kotwal, whole-time director and president (heavy engineering) at India’s largest engineering and construction company Larsen and Toubro Ltd (L&T), said the decision removes one of the critical anomalies that the private sector is currently facing. “This will give the private companies a level playing field with defence PSUs. This move will obviously help the private companies step up their manufacturing presence in defence. But this was one of the several steps what private sector is looking for," Kotwal said.
L&T has made significant inroads in the defence equipment manufacturing business.
Commerce and industry minister Nirmala Sitharaman said in an interview that the move was taken with an intention to make India competitive and there is nothing wrong in providing a level playing field to state-owned and private sector units. “Defence PSUs are definitely well-equipped to meet market challenges. Smaller and medium size units who have developed their own technologies, fought the system, survived in the market are today giving us very good alternatives as producers with certain credibility. PSUs have very good people who are able to come out with very good designs and patents which are finding extremely competitive rates. So it is done with the intention of making India far more competitive," she added.
Defence is one of the key focus areas of the government’s ‘Make in India’ push. India remains one of the largest arms importers in the world.
“When the defence PSUs or their suppliers imported or manufactured equipment and supplied it to the armed forces, they did not have to pay customs or excise duty. But private companies had to pay these duties, which automatically increased their cost of production," said Dhiraj Mathur, leader, aerospace and defence, at PricewaterhouseCoopers India. “But this was not very relevant earlier when very few bids were open for the private sector. But now with the focus of this government on promoting domestic manufacturing, more bids in the defence sector are likely to be open for private sector participation," he said.
India’s defence budget allocation is expected to be $620 billion between financial year 2014 and 2022, of which 50% will be on capital expenditure, according to a report released by industry lobby group the Federation of Indian Chambers of Commerce and Industry and financial services company Centrum Capital Ltd in February 2015. The annual opportunity for Indian companies—both state-owned and private—is expected to reach $41 billion in size by financial year 2022 with $168 billion of cumulative opportunity between fiscal 2014 and fiscal 2022, driven by domestic and external demand, the report said.
“The government is proactively ensuring a level playing field between government-owned companies and private companies. The latest move bodes well for the ambitions of private defence companies," said Bhavesh Gandhi, founder, executive vice-chairman and managing director, Pipavav Defence and Offshore Engineering Co Ltd. Reliance Group-controlled Pipavav Defence has India’s largest, and one of the world’s largest, dry docks, measuring 662m in length and 65m in width. A second dry dock, measuring 750m in length and 60m in width, is under development. Pipavav Defence has the capabilities to produce a wide range of naval vessels for defence, offshore assets, hydrocarbon vessels and commercial applications.
Asit Ranjan Mishra in New Delhi contributed to this story.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
